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Value Investing 101: Everything You Need To Know About Value Investing
A Serious and Must Read For " Fundamental Investors "
A Mega Thread
Inspiration -- @FI_InvestIndia
A Serious and Must Read For " Fundamental Investors "
A Mega Thread
Inspiration -- @FI_InvestIndia
What is value investing?
It is an investment strategy to buy quality stocks at “undervalued price”.
What is undervalued price?
A market price below its intrinsic value is undervalued.
It is an investment strategy to buy quality stocks at “undervalued price”. What is undervalued price?
A market price below its intrinsic value is undervalued.
Few famous value investors are Warren Buffett, Peter Lynch, and Joel Greenblatt.
The founder of value investing is Benjamin Graham and David Dodd.
The founder of value investing is Benjamin Graham and David Dodd.
All value investors follow a theory:
“The market does not price its stocks fairly all the time.”
As a result there will always be few stocks which will be available at a price below its intrinsic value.
“The market does not price its stocks fairly all the time.”
As a result there will always be few stocks which will be available at a price below its intrinsic value.
Value investing principles can also be used to screen-out low quality stocks.
Value Investing: An Investment Strategy
Stock market is full of stocks.
There are more than 5,000+ number stocks in Bombay Stock Exchange (BSE).
For a potential investor critical question is, out of all stocks, which is good for purchase?
There are more than 5,000+ number stocks in Bombay Stock Exchange (BSE).
For a potential investor critical question is, out of all stocks, which is good for purchase?
This is what a specific investment strategy will answer for an investor.
Basically there are four types of investment strategies around:
Basically there are four types of investment strategies around:
1. Passive Investing :
This form of investing asks investors to invest in a basket of stocks instead of individual stocks.
Examples of such baskets are mutual funds, index funds, ETF’s etc.
This form of investing asks investors to invest in a basket of stocks instead of individual stocks.
Examples of such baskets are mutual funds, index funds, ETF’s etc.
Hence, a person who is following a passive investing strategy will not care about individual stocks.
2.Technical Investing:
Here the strategy is to target those stocks which is showing momentum.
The focus is on taking advantage of the price movements only.
It cares least about price valuation and health of the underlying company.
Here the strategy is to target those stocks which is showing momentum.
The focus is on taking advantage of the price movements only.
It cares least about price valuation and health of the underlying company.
3. Growth Investing:
Here the strategy is to find those stocks whose underlying companies are destined to grow fast in future.
This investment strategy will point towards a stock even if it looks overvalued.
Here the strategy is to find those stocks whose underlying companies are destined to grow fast in future.
This investment strategy will point towards a stock even if it looks overvalued.
4. Value Investing:
Out of all stocks trading in stock market, value investors will pick only fundamentally strong stocks trading at undervalued price levels.
To judge undervaluation, value investors estimates the company’s intrinsic value.
Out of all stocks trading in stock market, value investors will pick only fundamentally strong stocks trading at undervalued price levels.
To judge undervaluation, value investors estimates the company’s intrinsic value.
Typical Characteristics of Value Investors :
The way value investors practice investing is different from other investors.
The way value investors practice investing is different from other investors.
Here are few characteristics which is unique among value investors:
Lazy :
Value investors rely on deep thinking.
Hence, externally they often look like lazy.
Most of the time value investors are doing nothing.
They do not buy stocks all the time.
Lazy : Value investors rely on deep thinking.
Hence, externally they often look like lazy.
Most of the time value investors are doing nothing.
They do not buy stocks all the time.
Instead, most of the time they are sunk deep into reading, doing maths and calculations.
The number crunching is done to identify value stocks.
The number crunching is done to identify value stocks.
Contrarian :Value investors do not invest in stocks with a herd mentality.
Instead, they will buy those stocks which others are selling.
Hence they are able to get them at a substantially discounted price.
When majority are buying stocks for day trading, value investors buy them with intensions of holding forever.
Financial Interpreter : Value investors invariably displays two key skills:
(a) they easily read and interpret financial statements, and
(b) they know to estimate intrinsic value.
These two qualities (in combination) makes value investors unique in the world of stock investing.
Process of Value Investing --
Understanding the process of value investing is easy.
But it is not as easy to implement.
To make the implementation easier, investors must build their “circle of competence.
Understanding the process of value investing is easy.
But it is not as easy to implement.
To make the implementation easier, investors must build their “circle of competence.
The process of value investing --
The process starts with screening stocks based on its history.
The process starts with screening stocks based on its history.
1) Stock History:
Value investing is about picking stocks at discounted price.
They represent established companies which has a long history trail.
Warren Buffett will probably look at, at least last 15 years data of a company to estimate its intrinsic value.
Value investing is about picking stocks at discounted price.
They represent established companies which has a long history trail.
Warren Buffett will probably look at, at least last 15 years data of a company to estimate its intrinsic value.
2) Business Fundamentals:
Stock’s 10 years financial data should be checked to estimate the financial health of a company.
Idea is to shortlist those stocks which are fundamentally strong.
Stock’s 10 years financial data should be checked to estimate the financial health of a company.
Idea is to shortlist those stocks which are fundamentally strong.
Value investors will invariably invest in only those companies which are fundamental power houses.
3) Price Valuation:
This is the ultimate screener.
No matter how established is the company, no matter how strong are its business, it is not enough.
Value investors will not rest till it calculates the intrinsic value.
This is the ultimate screener.
No matter how established is the company, no matter how strong are its business, it is not enough.
Value investors will not rest till it calculates the intrinsic value.
To be more sure of the calculation, they will also apply a suitable margin of safety.
Once this is done, comparing current price with intrinsic value value will highlight if the stocks is undervalued or overvalued.
Undervalued stocks becomes a good buy.
Undervalued stocks becomes a good buy.
How to Buy Stocks Like Value Investors?
How we buy stock: If we are investing on our own, we tend to buy stocks of “popular companies”.
What are popular companies?
Such companies which is already making lot of buzz in the stock market.
But the problem with such stocks is that, their market price is often overvalued.
How to Buy Stocks?
Step 1: Value investing is about identifying companies which are fundamentally very strong.
Step 1: Value investing is about identifying companies which are fundamentally very strong.
Step 2: Once a company has been identified as one representing strong business, go to the next step of estimating its intrinsic value.
In order to estimate intrinsic value, one needs to read companies Annual reports.
This reading takes time.
It also makes us aware of the “real things” happening inside the company.
@FI_InvestIndia suggest Reading 5 Year's Annual Report.
This reading takes time.
It also makes us aware of the “real things” happening inside the company.
@FI_InvestIndia suggest Reading 5 Year's Annual Report.
Circle of Competence --
Stock investing must be practiced within ones circle of competence.
What does it mean?
Stock investing must be practiced within ones circle of competence.
What does it mean?
Value investing is not only about Stock Analysis.
It is more about understanding the core business operations of the company.
It is more about understanding the core business operations of the company.
Analysts who understand core business of a company, tend to do better stock analysis.
Value investing is about understand the “underlying business” behind a stock.
Value investing is about understand the “underlying business” behind a stock.
How to build the “circle of competence”?
One can build a circle of competence from scratch.
The right ways to do it is to download the annual report of a company and start reading it from front to back.
One can build a circle of competence from scratch.
The right ways to do it is to download the annual report of a company and start reading it from front to back.
Once the reading is done, repeat the same process for another company in the same sector.
After reading the annual reports of two companies, try answering the following questions, or look for the answers in the annual reports.
You can also take help of internet.
After reading the annual reports of two companies, try answering the following questions, or look for the answers in the annual reports.
You can also take help of internet.
1. Product & Customer:
Is it an established company, or it is a new start up?
What are the products and services of the company?
Which are the top products or services of the company which is generating maximum revenue?
Is it an established company, or it is a new start up? What are the products and services of the company?Which are the top products or services of the company which is generating maximum revenue?
Who are its end users?
These products and services are in high demand?
The products and services are unique in comparison to its competitors?
How does the company sell its products and services?
These products and services are in high demand?
The products and services are unique in comparison to its competitors?
How does the company sell its products and services?
Geographically, where are the products and services of the company get sold?
2. The Company:
Company’s top management is reliable?
How stable are the company’s sales?
The company’s brand recognition is strong?
Company’s top management is reliable?
How stable are the company’s sales?
The company’s brand recognition is strong?
How big is the company now, compared to its competitor?
The customer base is widespread?
The company operates in a sector which is regulated by government?
How satisfied are the employees of this company?
The customer base is widespread?
The company operates in a sector which is regulated by government?
How satisfied are the employees of this company?
3. Resilience:
During economic slowdowns, the turnover is affected?
How price sensitive are the product sales?
During economic slowdowns, the turnover is affected?
How price sensitive are the product sales?
4. Financial Data:
Is the company able to generate positive free cash flow.
How predictable is the free cash flow for next 10 years?
Is current price above or below its intrinsic value?
Is the company able to generate positive free cash flow.
How predictable is the free cash flow for next 10 years?
Is current price above or below its intrinsic value?
Answering these few questions can help the investors to make an informed guess about the company (its stock).
Value Estimation --
The calculated present value is called “intrinsic value”.
The accurate will be the future cash flow estimation, precise will be the intrinsic value calculation.
The calculated present value is called “intrinsic value”.
The accurate will be the future cash flow estimation, precise will be the intrinsic value calculation.
for a value investor, the focus should be on knowing enough about the company so that it helps in judging future cash flows as accurately as possible.
If you want to invest in stock market, you must learn to practice value investing.
The investor must at least know how to value stocks of companies.
This way he/she will at least not invest blindly.
The investor must at least know how to value stocks of companies.
This way he/she will at least not invest blindly.
That's It For The Thread 
Also Check Out -- https://twitter.com/MoneyWisdom_/status/1385457236525436928?s=19
Also Check Out -- https://twitter.com/MoneyWisdom_/status/1385457236525436928?s=19
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